Question

Tyrell Company issued callable bonds with a par value of $10,000. The call option requires Tyrell to pay a call premium of $500 plus par (or a total of $10,500) to bondholders to retire the bonds. On July 1, Tyrell exercises the call option. The call option is exercised after the semiannual interest is paid the day before on June 30. Record the entry to retire the bonds under each separate situation.

(1) The bonds have a carrying value of $9,000.
(2) The bonds have a carrying value of $11,000.

Answer 1

Answer:

Explanation:

Tyrell company

Journal entries

Jul-01

Dr Bonds Payable $10000  

Dr Loss on retirement $1,500  

  Cr Discount on Bonds Payable [10000 - 9000]  $1,000

  Cr Cash [10000 + 500]  $10,500

Jul-01

Dr Bonds Payable $10,000  

Dr Premium on Bonds Payable [11000 - 10000] $1,000  

  Cr Gain on retirement of bonds  $500

  Cr Cash [10000 + 500]  $10,500

Answer 2

Bonds are the financial investment instruments that provide fixed returns to the investors bearing no or loss rate of risk. The bonds are usually issued by the government. The types of bonds are corporate bonds and municipal bonds.

The journal entries for the retirement of the callable bonds under two different carrying values are attached below in the image.

Working Note:

1) The bond carrying value is $9,000 and its face value is $10,000, this means $1,000 is the amount of discount. The cash value is the sum of the face value of $10,000 and the premium value of $500.

2) The bond carrying value is $11,000 and its face value is $10,000, this means $1,000 is the premium amount.

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